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(f) Consider the market index. What is its expected return between t = 0 and t = 1'? What is the variance of the return?
(f) Consider the market index. What is its expected return between t = 0 and t = 1'? What is the variance of the return? What is the covariance of the return on the market index and the return on investing in the put between t = 0 and i; = 1? Solution: The expected market return is (115 [/2 + 95 [2) _ 1 = 0 .05 or 5%. The variance of the return is ((0 .15 _ 0.05)2 + ( _0 .05 _ 0.05)2)/2 = 0 .01. The covariance of the market with the put is (0 .1 * \"LS/20.625 _ 0.1 * 25/20.625)/2 = _0.042
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